Do you worry about reducing your credit card debt? If yes then why are you only paying the minimum payment on your credit cards? The first thing you have to learn is how to be smart with your credit card debt.
Many think that if they keep paying the minimum payment every month they will pay off the balance within months? Well, that is not the case and we have to sort this problem out and fast.
Credit card companies love the fact that we only pay the minimum payment every month. Why? because they are raking it in while the interest rates are constantly increasing our balance.
So what started out as a small credit card bill could escalate into thousands of dollars over time, so be smart with your credit card debt.
Let’s say your credit card statement arrives and your balance is $2000. The minimum payment is only $40 which is 2% of your balance. Now, if you keep paying just the minimum payment. It’s the interest that most of your $40 payment is going to, and not much to your principal balance.
Example: Paying off a $2,000 credit payment at 18% APR with a minimum monthly payment of 2% ($40 dollars or less) will take you 30 years to pay off the amount plus interest.
The minimum re-payments have dropped as the credit card companies and banks originally charged a higher re-payment amount. But, they found that customers were paying their debt back a lot quicker.
So the way for them to get more money out of us was for them to reduce the percentage of the minimum payment, making us think that they were helping us. But in fact, they were just getting more money from us by adding on more interest, as it will take longer for us to pay off the credit card debt.
So what to do if you find yourself in this situation:
Stop using your credit card, better still cut it up (in case you get tempted.) Sit down and work out how much more you can pay than the minimum payment they’re asking for. Once you have worked out how much stick to it even when you see the minimum payments going down.
Don’t be tempted to reduce your payment amount or you will be back to square one.
If you have more than one credit card the best way to reduce your debt is once again to stop using them. Work out which one has the highest interest rate and make the highest payment to that card.
Keep paying the minimum payment on your other cards and once the card with the highest interest rate is paid off. Then, go to the next highest card and so on until all your cards are paid off.
Review Your Credit Report Regularly
Monitor your credit report from all three major credit bureaus – Experian, TransUnion, and Equifax – on a regular basis. Check your credit profile at least annually.
Review it carefully and make sure that any past mistakes or disputes have been corrected.
Also, if you notice an account listed that you know that you have not personally opened, contact that creditor and the credit bureaus immediately. This could be a sign that you’ve had your identity stolen.
Request to have a fraud alert placed on your profile and account to protect yourself and your credit. Identity theft is the fastest-growing consumer crime in America, with an estimated 1 million people victimized each year.
Establish good credit habits early in life and reap the benefits that your good credit rating will provide you for the rest of your financial future.
You may have to tighten your belt for a while!
But this will save you a lot of money in the long run.
Yes, we all need credit cards and if you use them properly they are fine! But if you cannot afford to pay them off, then you get yourself into trouble.
As a consumer, you’ve learned the importance of establishing a good credit rating with your lenders. Whether you are shopping for a new home or auto. Or searching for the best deals on insurance, your creditworthiness will be judged by your credit rating or credit score.
Having a bad credit history or bad credit habits will place “black marks” on your credit profile. These include things such as late payments, having an account assigned to a collection agency, and of course bankruptcy.
Establishing good credit habits and therefore a good credit rating will improve your creditworthiness. This will be reflected in potential lenders offering you substantially lower interest rates and better deals on credit offers.
Knowing how to manage money matters – but it’s not something that just grows on its own. Not without a strategy, time, a growing awareness, and specific knowledge.
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***The content contained on the Inker Street website is for informational and educational purposes only. This information should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor. We strive to write accurate and genuine informative articles, and all views and opinions expressed are solely those of the authors.